LEGISLATIVE BUDGET BOARD Austin, Texas FISCAL NOTE 75th Regular Session April 21, 1997 TO: Honorable Tom Craddick, Chair IN RE: House Bill No. 1855, Committee Report 1st House, Substituted Committee on Ways & Means By: Eiland House Austin, Texas FROM: John Keel, Director In response to your request for a Fiscal Note on HB1855 ( Relating to the sales tax exemption for items used in manufacturing tangible personal property for ultimate sale.) this office has detemined the following: Biennial Net Impact to General Revenue Funds by HB1855-Committee Report 1st House, Substituted Implementing the provisions of the bill would result in a net positive impact of $128,234,000 to General Revenue Related Funds through the biennium ending August 31, 1999. Fiscal Analysis The bill would amend Section 151.318 of the Tax Code, relating to the sales tax exemption for certain property used in manufacturing. The bill would limit the exemption in subsection (a)(2) by specifying that in order to qualify for exemption from sales taxes, tangible personal property must be directly used or consumed in the actual manufacturing process and must directly make or cause a chemical or physical change to either the product being manufactured for sale or any intermediate item that would become a component part of that product. Certain items of tangible personal property used to power or control equipment exempt under (a)(2) to generate electricity, chilled water, or steam for sale would be exempted. The bill would specify that the exemption specifically did not apply to intraplant transportation equipment used to move a product or raw material in connection with the manufacturing process. Piping and conveyor systems would be identified specifically as intraplant transportation equipment that would not qualify for the exemption. Machinery and equipment or supplies used to maintain or store tangible personal property would be defined as not qualifying for exemption. The bill would specify that any taxpayer claiming an exemption under this bill would have the burden of proof that the exemption claimed was applicable. No exclusion under 151.318(c) of the Tax Code would be applicable. The bill would take effect October 1, 1997. Methodolgy The bill would effectively reverse two recent court decisions, Tyler Pipe v. Sharp and Chevron Chemical v. Sharp, that resulted in an expansion of the sales tax exemption for manufacturing equipment, and it would codify Comptroller policy as it existed before those decisions. The fiscal impact on state and local revenues would consist only of the prospective gain to the tax base; the State of Texas would still be liable for refunds of taxes previously paid on the types of items addressed by the Tyler Pipe and Chevron cases for the periods preceding the effective date of the bill. The probable fiscal implications of implementing the provisions of the bill during each of the first five years following passage is estimated as follows: Five Year Impact: Fiscal Year Probable Revenue Probable Revenue Probable Revenue Probable Revenue Gain/(Loss) to Gain/(Loss) to Gain/(Loss) to Gain/(Loss) to General Revenue Cities Transit Counties and Fund Authorities Special Districts 0001 LCL-CITY LCL-TRANSIT LCL-COUNTY 1998 $56,361,000 $8,627,000 $3,512,000 $813,000 1998 71,873,000 12,223,000 4,976,000 1,151,000 2000 83,493,000 14,200,000 5,781,000 1,338,000 2001 86,289,000 14,675,000 5,975,000 1,382,000 2002 89,179,000 15,167,000 6,175,000 1,429,000 Net Impact on General Revenue Related Funds: The probable fiscal implication to General Revenue related funds during each of the first five years is estimated as follows: Fiscal Year Probable Net Postive/(Negative) General Revenue Related Funds Funds 1998 $56,361,000 1999 71,873,000 2000 83,493,000 2001 86,289,000 2002 89,179,000 Similar annual fiscal implications would continue as long as the provisions of the bill are in effect. Source: Agencies: 802 Parks and Wildlife Department 304 Comptroller of Public Accounts LBB Staff: RR ,SM